Active Management Under Fire

Since Gatemore’s inception nine years ago, we have been advocates of using ETFs (exchange-traded funds) and other low cost options in traditional asset classes such as developed market equities, core fixed income and even some emerging markets. We are clearly not alone. Last year Calpers, the largest US public pension fund said it would use index-tracking strategies in areas where it could not be demonstrated that active management could add value. Then last week the UK government proposed switching almost half of the £179bn in assets controlled by the Local Government Pension Scheme to index tracking funds (FT: Alarm Bells Ring for Active Managers). The logic is much the same — why pay high fees to an active manager who is more or less tracking the index when there are a myriad of cheaper options available?

An unnamed manager of a large UK private pension scheme was quoted in the FT as saying “I am sympathetic to the thrust of the UK proposals. The question of whether we are getting value for money is always on our mind… I am not against active managers, just high fees.”

As the FT aptly put it, “Alarm bells are sounding for active fund managers.” However, in our opinion, the pendulum should not swing too far away from active management. In fact, the debate should not be about active vs. passive, but about how to combine active and passive management to efficiently allocate fee dollars and maximize value.

We recommend using active strategies in less correlated, “alternative” asset classes where managers can take advantage of market inefficiencies. Absolute return managers have fewer constraints than “traditional” active manager and are not paid to hug a benchmark index. As a result they can generate outsized returns relative to the broad market, often with less risk. A word of caution – with few constraints, manager dispersion can be very high amongst hedge funds. It pays to spend time on research and diligence to find those managers with the right experience and expertise.

Given the bespoke nature of Gatemore’s business, the mix of active and passive varies for each client. In investing, as in everyday life, the key is to spend wisely and make it count.